Sir, Martin Wolf appears to be unduly sanguine about the economic impact of Hurricane Katrina ("How rising oil prices add to the world economy's fragility", September 7).

In Mr. Wolf's assessment, Katrina in itself is unlikely to prove economically important even when taking into account its likely impact on international oil prices.

A key point that Mr. Wolf overlooks is that unlike in earlier energy crises, Katrina has involved not only crude oil supply disruptions but it has also involved serious supply disruptions to natural gas, refined petroleum products and electricity production.

In particular, as much as 16 per cent of U.S. natural gas has been shut in, which has led to a very much sharper spike in natural gas than in crude oil prices, which will be sorely felt this winter.

At the same time, as much as 10 per cent of U.S. refining capacity has been affected at a time when there is no slack in the world's refining system.

Mr. Wolf also seems to overlook the fact that the present energy shock is taking place at a time when US monetary policy accommodation is being withdrawn, albeit at a measured pace. It would seem reasonable to anticipate that the Federal Reserve might soon pause in its withdrawal of monetary policy accommodation should the U.S. economy weaken.

However, it would seem highly unlikely that the Federal Reserve will actually cut interest rates to offset Katrina's contractionary impact on aggregate demand at a time when US inflation will be significantly boosted by higher energy and food prices in the wake of the hurricane.

Desmond Lachman is a resident fellow at AEI.